Essays on incomplete information in economic development

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Steele, Jennifer Lynn

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This thesis studies the effects of incomplete information on economic development. Relaxing the assumption that information is complete allows for corruption to occur, even in equilibrium, and for poverty traps to develop. The first paper looks at how the lack of enforcement mechanisms affects contracts, and how a more efficient contracting mechanism can be developed in aid settings. I find that as the level of corruption increases, the contract will encompass more stages. In the second paper, the agent's level of corruption is unknown, and the principal may screen agents by including corruption with positive probability. This would account for the corruption seen in development projects as an equilibrium effect. The third paper looks at the effect of uncertainty about foreign productivity on a firm's foreign direct investment (FDI) decision. Dependent on the form of the information, this may result in either an underinvestment of FDI, or no FDI at all.




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